USD/JPY consolidated on Friday after a period of dollar strength sparked a 150 pip rally in the pair.
The Yen has weakened significantly against the dollar in recent sessions as perceived paths of interest rates diverged amid strong US PPI and doubts around a rate cut in September.
“The USD/JPY pair has experienced a significant movement in recent trading sessions, climbing more than 150 pips from its three-week low of 146.220 before retreating today to trade around 147.151, driven by a combination of economic factors that have brought the U.S. and Japanese economies closer together,” said Rania Gule, Senior Market Analyst at XS.com.
“In my view, what occurred is not merely a short-term speculative rebound but rather reflects shifts in monetary policy expectations for both countries, within a changing global inflation environment and renewed debate over interest rate paths.”
“Recent U.S. data played a crucial role in boosting demand for the dollar, with July’s Producer Price Index coming in well above expectations, marking the largest monthly increase since June 2022. This has reignited the belief that price pressures in the U.S. have not yet receded enough to justify a rapid easing of monetary policy. From an economic perspective, this suggests the Federal Reserve may be compelled to keep interest rates higher for longer and could slow the pace of monetary easing that markets had begun to anticipate. In my opinion, this reading increases the likelihood of repricing the U.S. yield curve to higher levels, boosting the dollar’s appeal against the yen and other low-yielding currencies.”
Gule concluded that the dollar remains in the driving seat for the pair in the short term.
“In my opinion, the market is presently in a sensitive phase, with prices caught between a U.S. economy strong enough to support the dollar and the possibility of a Japanese policy shift that could later give the yen a boost,” Gule said.
“I believe that in the short term, the advantage still lies with the dollar as long as expectations for high U.S. rates persist, but any official indication from the BOJ about a rate hike could quickly alter the balance.”